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Finance Transformation the Outsourcing Perspective

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Finance Transformation the Outsourcing Perspective

  1. 1. In association withFINANCE TRANSFORMATION –THE OUTSOURCING PERSPECTIVEA FINANCE & MANAGEMENT SPECIAL REPORTSR31 | DECEMBER 2010BUSINESS WITH CONFIDENCE icaew.com/fmfac
  2. 2. FINANCE TRANSFORMATION – THE FOREWORDOUTSOURCING PERSPECTIVEA special report published by:Finance and Management Faculty THE STORY CONTINUES...Chartered Accountants’ HallMoorgate PlaceLondon EC2R 6EAT +44 (0)20 7920 8508F +44 (0)20 7920 8784E fmfac@icaew.comicaew.com/fmfacChris JacksonHead of facultyT +44 (0)20 7920 8525 It is six years since the Finance & Management Faculty produced its specialE chris.jackson@icaew.com report ‘From outsourcing to offshoring’. In that time I expect that the vastEmma Riddell majority of large businesses will have considered outsourcing at some point,Technical manager and many will have taken the plunge with varying degrees of success.T +44 (0)20 7920 8749 During those six years we have also experienced the international creditE emma.riddell@icaew.com crunch and are said to be entering into the age of austerity. TheseRick Payne circumstances have required all businesses to review their cost base and toFinance direction programme consider if their structure is fit for purpose. The finance function is notT +44 (0)20 7920 8451E rick.payne@icaew.com exempt, and has no doubt been under the spotlight in many organisations. With this in mind this special report ‘Finance Transformation – theCaroline Wigham Outsourcing Perspective’, is timely. Many of the key issues from 2006 remainServices managerT +44 (0)20 7920 8508 the same: deciding what and with whom to outsource, negotiating terms andE caroline.wigham@icaew.com managing the associated risks. Other aspects have evolved, including the range and attractiveness of outsourcing locations available and the use ofThe aim of this series of special reports is more blended models combining onshore, offshore, in-house, outsourced andto provide faculty members with a review various styles of management. You should find these two reportsof a topical theme within the subject areasof finance and management, offering complementary; for details of how to access the previous report see theboth analysis of the relevant theory and further reading section on page 28.review of the practical application of Whilst this report does focus on outsourcing, many of the topics discussedappropriate management techniques. will also be useful if you are considering other solutions such as in-houseComments and suggestions should be shared service centres. The authors, Capgemini, share their expertise on topicsaddressed to Emma Riddell. including service level agreements, people management, and innovation andThe information contained in this and technology. Equally whilst this report is aimed at larger businesses there willprevious issues of this publication is be some useful lessons for smaller organisations.available (to faculty members only) on thefaculty website at icaew.com/fmfac The number of case studies in the report is necessarily limited; however we would be really interested to hear your experiences. Have you outsourced anyF&M SPECIAL REPORTS part of your finance function? If so, which? Do you have any lessons that you... are produced on behalf of the faculty by could share with your fellow members? We would also be very pleased toSilverdart Publishing,211 Linton House, 164–180 Union Street, hear any questions or feedback that you have. Visit our LinkedIn group andLondon SE1 0LH. join in the conversation at www.linkedin.com – ICAEW Finance &T +44 (0)20 7928 7770 Management Faculty.www.silverdart.co.ukContact: Alex Murray or Hannah Buckenquiries@silverdart.co.uk© ICAEW 2010. All rights reserved. Theviews expressed herein are not necessarilyshared by the ICAEW’s council or the EMMA RIDDELLfaculty. No part of this publication may bereproduced or transmitted in any form orby any means, or stored in any retrievalsystem of any nature without prior writtenpermission, except for permitted fairdealing under the Copyright, Designs andPatents Act 1988, or in accordance withthe terms of a licence issued by theCopyright Licensing Agency in respect ofphotocopying and/or reprographicreproduction. Application for permissionfor other use of copyright materialincluding permission to reproduce extractsin other published works shall be made tothe publishers. Full acknowledgement ofauthor, publisher and source must begiven. No responsibility for loss occasionedto any person acting or refraining fromaction as a result of any material in this Chris Jackson is head Emma Riddell ispublication can be accepted by ICAEW or of faculty, Finance & technical manager,the author(s). Management Finance & Faculty, ICAEW. ManagementISBN 978-0-85760-079-0 Faculty, ICAEW. icaew.com/fmfac
  3. 3. FINANCE TRANSFORMATION – THE OUTSOURCING PERSPECTIVECONTENTS02 INTRODUCTION 20 FURTHER DEVELOPMENT MARKET OVERVIEW CONTINUOUS IMPROVEMENT LEADS TO WORLD CLASS Recent trends in the sourcing market are discussed, along PERFORMANCE with ways in which outsourcing can benefit your company. Here we look at how to become a world class performer, by focussing on complexity reduction and operating excellence.05 CHOOSING A PATH SELECTING THE RIGHT SOURCING MODEL 24 PROCESSES Here the potential models and motivations for sourcing are TRANSFORMATION THROUGH INNOVATION AND NEW highlighted, along with the possible risks. TECHNOLOGY The possibility of further development from implementing09 THE FINAL SELECTION up to the minute technology is assessed. MAKING THE DECISION The importance of location, pricing, security and ease of 26 CONCLUSION transition are outlined in this section, with information to TRANSFORMING FAO help the decision making process. Transforming your organisation is a challenge, one which can benefit from a good sourcing partner.13 CONTRACTS CONTRACTUAL ISSUES AND GOVERNANCE MODELS 27 APPENDIX A good sourcing relationship is dependent on establishing a GLOSSARY clear and unambiguous contract. Key questions and things to consider are outlined here. 28 ADDITIONAL RESOURCES BOOKS, JOURNAL ARTICLES AND MORE15 CUSTOMER SERVICE SERVICE LEVEL AGREEMENTS AND QUALITY ASSURANCE 29 PREVIOUS SPECIAL REPORTS The importance of KPIs, benchmarking and service level agreements to maintaining high levels of performance are discussed in this section.18 HUMAN RESOURCES PEOPLE MANAGEMENT Maintaining a keen workforce is crucial during such massive organisational change. We offer some advice on ways to ensure a smooth transition.FINANCE & MANAGEMENT SPECIAL REPORT December 2010 01
  4. 4. INTRODUCTION MARKET OVERVIEW This introduction provides an insight into the outsourcing market, and discusses the recent trends seen in the area, as well as how your company can benefit from employing this strategy. Global sourcing The finance and accounting (F&A) sourcing strategy The global finance and accounting outsourcing (FAO) must focus on cost, quality and flexibility. What is market is part of the global sourcing market, which more, the days of chief financial officers (CFOs) encompasses both in-house and outsourced looking to offshoring and outsourcing solely for cost centralised sourcing of all business and IT functions. and compliance control are gone irrevocably. For a more comprehensive perspective of the FAO In the aftermath of the global financial crisis, CFOs marketplace, it is worthwhile considering the are being compelled to balance cost pressures against dynamics currently at play on the global sourcing business outcomes. There is a myriad of options for market, which continues to flourish, with 498 transforming the organisation’s finance function into a transactions concluded in Q2 2010 (from 444 in Q1 ‘business partner’ capable of carving out value by 2010). Yet, though more transactions were activating effective finance infrastructure; decision- concluded, they concerned narrower scope and/or making support; and enhanced assurance. shorter terms. That’s why a shared services sourcing strategy – In the period, the market heard about the opening regardless of whether implemented internally or with of 38 captives by well-known players such as JP an external partner – needs to consider how to assure Morgan, Oracle, Microsoft, Western Union, Shell, HP, cost reduction and standardisation whilst demanding Huawei and Intel. At the same time, 32 business that added value be squeezed out of the back office to process outsourcing (BPO) delivery centres were set drive insight beyond transaction processing. up, mostly in India. For readers who would appreciate help with Though the transaction volume grew, the definitions, we have included a glossary on page 27. aggregate annual contract value (ACV) declined. The growth was led by the BPO market, which witnessed ‘A shared services sourcing strategy needs to consider how to assure cost reduction and standardisation whilst demanding that added value be squeezed out of the back office to drive insight beyond transaction processing’ ABOUT THE AUTHOR Carole Murphy is vice president at Capgemini Consulting where she leads the global finance & employee transformation practice. She joined Capgemini in 1996 and has been vice president in the UK since 2006. Carole works with global organisations to develop and implement finance and HR strategy and transformations which incorporate shared services and business process outsourcing. Prior to joining Capgemini, Carole worked in industry as a finance controller. She was born and educated in Dublin and is a qualified management accountant and lawyer. For further information on Capgemini, see page 26.02 icaew.com/fmfac
  5. 5. ‘Cost saving remains the key criterion for organisations in the process of defining the right sourcing strategy’15% and 33% increase in transactions and ACV, Trends in ‘how?’respectively (measured quarter-on-quarter). The Organisations are proactively balancing:banking, financial services and insurance (BFSI) • the scope of shared services operations – operatingvertical contributed one-fifth of market activity, ie 102 multiple functions and processes and servicing atransactions in Q2 2010.1 number of business units from global or regional centres;The FAO market • how they source the services – flexing betweenThe global FAO market is differentiated by the scale outsourced and in-house service delivery under aand experience of delivery that the F&A BPO vendors number of smaller contracts; andhave. Based on the value of commercial contracts • where the shared services centre (SSC) operates –awarded in the first half of 2010, the top 10 service leveraging the labour pools, shrinking the costproviders in the FAO space are, in alphabetical order: base, and minimising risks of geographies, across• Accenture; the globe.• Capgemini;• EXLService; Trends in ‘where?’• Genpact; The current BPO offshore delivery locations for F&A• HP; are Brazil, Canada, the Czech Republic, Hungary,• IBM; India, Ireland, the Philippines, Poland and Romania.• Infosys; Based on current trends and market activity,• TCS; Gartner expects China, Costa Rica, Jamaica, Malaysia,• Wipro; and Mexico and Vietnam to come to the forefront, as• WNS.2 strong FAO providers.5 In the second quarter of 2010, high offshore activity, ie the most service centres setAnalysts’ forecasts of market value and growth rate up, was noted in China, India and the Philippines.6vary within a wide band – they expect compounded Low-value transactional processes, requiring limitedaverage annual growth rate (CAAGR) of between 8% language skills, are being located offshore andand 11% to between $16bn and $30bn of market processes requiring customer contact and specialistvalue by 2013. language skills are tending to stay nearshore for a Nevertheless, all analysts predict the market will combined delivery model.remain strong and will continue to expand, especially Notably, half of all Top 2000 captive service centresgiven the fact that overall client satisfaction from FAO and Top 50 supplier centres set up in India duringcontinues to rise every year.3 the last year were in Tier 2/3 locations, ie outside the major outsourcing locations. However, this growthSourcing trends has been mainly restricted to third-party suppliers. Captives continue to prefer Tier 1 locations.7Trends in ‘why?’Cost saving remains the key criterion for organisations Trends in ‘pricing’in the process of defining the right sourcing strategy. In the last two years, deals are emerging with aBut even in low-wage countries such as India and blended pricing model, which also utilises elementsChina prices are rising and margins are becoming of full-time equivalent (FTE) and transactional pricing.tighter. “Today, most F&A BPO deals are with clients Although the majority of deals are fixed-price orthat want to source F&A administration processes price-per-FTE based with the supplier expected tofrom lower-labour-cost locations and garner better streamline and standardise accounting processes,F&A practices. Buyers must look at a provider’s organisations are looking to suppliers forquality, vertical market expertise (which is becoming transformational services.increasingly important as providers learn about The use of service level agreements (SLAs) is alsospecific industries’ finance needs, such as payment evolving. In the first few years of a contract,terms and supplier types), and global delivery models customers stipulate a number of service levels, and asto ensure a full evaluation of providers’ abilities.”4 a deal matures, the number and type of service levels Customers recognise that it is possible for shared used is streamlined.8services to go beyond transactional/operational work FAO customers have learned that the success of ato achieve new productivity gains and new revenue service from a supplier is directly proportional to thestreams by implementing new practices through continued input and guidance of the customer’sunique, creative methods of implementing finance and IT team. Research shows that the moststandardisation and automation, driving continuous satisfied F&A BPO customers actively participate inimprovement, and assuring world-class performance. F&A BPO service delivery issues.9 As a reflection ofFINANCE & MANAGEMENT SPECIAL REPORT December 2010 03
  6. 6. ‘The focus on both sides is to move to a more end-to-end process-oriented view beneficial for both parties instead of just haggling over the production of activities in batches’ this, some contracts provide for gain-share mechanisms, as well as bonuses for high REFERENCES performance, rather than penalties for low performance. Working in partnership also ensures 10 Everest Global, Inc.: ‘Global Sourcing, Market Vista alignment, coordination and control of both supplier Q2 2010’, 2010, slide E2-3. and business needs. 20 TPI: ‘The TPI Index: An Informed View of the State Fearing that their services will become of the Global Commercial Outsourcing Market Q2 commoditised, as reflected in falling revenues and 2010’, slide 12. plummeting margins, suppliers are developing 30 Tornbohm, Cathy, ‘Magic Quadrant for proprietary best practices and processes and are Comprehensive Finance and Accounting BPO’, advising on and suggesting process improvements. Gartner, 17 December 2009, p. 3. The focus on both sides is to move to a more end-to- 40 Tornbohm, Cathy, ‘Magic Quadrant for end process-oriented view beneficial for both parties Comprehensive Finance and Accounting BPO’, instead of just haggling over the production of Gartner, 17 December 2009, p. 3. activities in batches.10 50 Tornbohm, Cathy, ‘BPO: What Does Good Look Like in 2010?’, Gartner Outsourcing & IT Services Summit in London, June 2009. 60 Everest Global, Inc.: ‘Global Sourcing, Market Vista Q2 2010’, 2010, slide II-1. 70 Everest Global, Inc.: ‘Global Sourcing, Market Vista Q2 2010’, 2010, slide II-5. 80 Tornbohm, Cathy, ‘Magic Quadrant for Comprehensive Finance and Accounting BPO’, Gartner, 17 December 2009, p. 3. 90 Tornbohm, Cathy, ‘Magic Quadrant for Comprehensive Finance and Accounting BPO’, Gartner, 17 December 2009, p. 3. 10 ‘Q&A Interview with Tom Bangeman’, Shared Services & Outsourcing Network, July 2010, p. 3.04 icaew.com/fmfac
  7. 7. CHOOSING A PATHSELECTING THE RIGHT SOURCINGMODELWhen considering sourcing it is important to look at all the possibilities. Here, thedifferent models, motivation and risks are analysed.Captive sourcing vs outsourcing • the fact that the business is under intense costA decision to undertake transformational change to back- pressure and needs to deliver immediate results;office operations often culminates in a decision between • the view that the amount of spend and/or changecaptive shared services (CSS) and business process required would be very hard to achieve internallyoutsourcing (BPO). Shared services refer to the grouping and needs to be handled in partnership with anof skills into a separate unit and the provision of a expert; andcommon service by the one unit. • a lack of specialist legal knowledge to run an In the CSS model, that grouping is done in-house – offshore location.while BPO is the delegation of the provision of businessprocesses to a third party. Which operating model is Sourcing modelschosen depends on the maturity, ambition and culture of Selecting the right sourcing model means finding thean organisation. Figure 1 (below) graphs the variance in right combination of ownership, location andthe key decision levers in the two operating models. management. Figure 2 shows how these decision Typical drivers for CSS include: drivers interact to create different sourcing models.• the desire to realise all initial cost savings;• concern of loss of process knowledge to a third party; Ownership axis• fear that BPO may restrict flexibility and cause Successful companies are using multiple or selective inefficiency; sourcing not just to save money but as a best practice• the objective to develop own shared services offering in which increases organisational flexibility and the market; and decreases time to market. They are taking a closer• the opportunity to improve internal operations before look at their processes and sub-processes to decide looking to an outsourcing partner. which sourcing option is best on a case by case basis. Disciplined multi-sourcing offers a new frameworkTypical drivers for BPO include: for greater control over sourcing decisions and• the decision that back-office activities are non-core and ensures that customer-supplier relationships deliver would be better handled by a third party specialist; value and support business strategies. Figure 1 Diagram 2 Operating model options and key levers for realising benefits of Operating model options and key levers for realising benefits of shared services Labour arbitrage Process efficiency Economies of scale Soft benefits Both captive shared Both solutions use best Both solutions employ Outsourcing of processes services and outsourcing practice and continuous economies of scale but does transfer a large can benefit from cheaper improvement to refine outsourcing often levers element of control to the labour but outsourcing functions but this is more this through outsourcer. tends to be more critical for outsourcing consolidated centres. location flexible. success. High Labour arbitrage and economies of scale allow outsourcing to operate at Leverage a lower cost base, however the client Med must transfer a significant element of process control over to the supplier. Low Captive shared services OutsourcingFINANCE & MANAGEMENT SPECIAL REPORT December 2010 05
  8. 8. ‘Successful companies are using multiple or selective sourcing not just to save money but as a best practice which increases organisational flexibility and decreases time to market’ Location axis back from offshore activities. The key lies in careful There are three types of locations in sourcing: onshore, planning, implementation and management of the nearshore, and offshore: delivery. • onshore offers best cultural and language alignment Many organisations are combining the models into and access to experienced staff; yet it is not likely to hybrids for flexibility in assuring the right level of risk be the lowest cost option; and cost savings while maximizing benefits such as • nearshore means cultural similarity but at a lower improved leveraging of capabilities and expertise. cost and provides access to highly educated staff. Figure 3 (opposite) illustrates how the lines between Yet, the staff may not be as experienced and the the models are now blurring, as organisations select language skills might be limited; and and design hybrids to best fit their own business reality • offshore is the lowest cost option that provides and needs. access to highly educated staff. There might be stronger cultural differences, greater potential for loss A word about risk of interaction and liaison, and access to language The perceived risks of outsourcing are related to the skills is limited. commercial relationship between the insourcer and the outsourcer. The benefits of the outsourcing deal might The terms ‘bestshoring’ or ‘rightshoring’ are be outweighed by the costs and perceived risks commonly used to describe the location mix choice in associated with outsourcing in the following areas: which processes are where the organisation can be • operating model; assured maximum leverage of the shared services • knowledge transfer to third party; model for a particular business function. • vendor selection; • negotiating price; Management axis • ensuring quality and continuity; It takes a lot of management effort to realise the • organisation change management; expected benefits of shared services and offshoring. • service level management; Poorly managed cost-saving strategies can end up • vendor governance; costing far more than the original savings planned. • geographical and political risk; and This has resulted in a number of companies pulling • data privacy. Figure 2 The split in scope of process functions between shared services and the retained organisation means a need for different competencies and skill sets in the two organisations. Captive offshored Spin off (eg offshored SSC) (eg new company) Shared support organisation (eg facility power house) Horizontally outsourced LOCATION (eg BPO vendor) Offshore Vertically outsourced (eg managed service provider) Near shoring Onshore Light management T EN EM Tight management AG Optimised house solution AN (eg in-house SSC) In-house Outsourced M In-house BPO vendor Selective sourcing or multiple sourcing is a combination of various sourcing options OWNERSHIP06 icaew.com/fmfac
  9. 9. ‘The perceived risks of outsourcing are related to the commercial relationship between the insourcer and the outsourcer’Though risk mitigation has been gradually losingimportance as a factor key to sourcing decisions,organisations still tend to choose their sourcingstrategy based on risk mitigation. By selecting anSSC, organisations want to ensure proximity to thebusiness, avoiding dependency on external suppliersand loss of knowledge. Figure 3 New models blending onshore, offshore and ownership decisions Added value/scope Global Hybrid model Global external delivery farshore • Own captive consolidated centre • Transactional activity consolidated to within ‘sphere of influence’ a single delivery centre delivered • Outsource partner externally from a farshore location Regional consolidation Regional consolidation delivered externally from nearshore Location • Consolidate as much activity as possible in one chosen location • Transactional activity consolidated to a • Build critical mass single delivery centre delivered • Professionalisation achievable externally from a nearshore location In country consolidation and external In country consolidation delivery • Consolidated operations country by • Consolidated operations country by country country • Standardisation achievable • Standardisation achievable • Suitable for operations with local scale • Suitable for operations with local scale Local In-house provision Ownership Outsource Shift in corporate Global business ambition alignmentFINANCE & MANAGEMENT SPECIAL REPORT December 2010 07
  10. 10. ‘The integrated distributed model is focused on using onsite, nearshore, offshore, and client teams’ CASE STUDIES: WHAT SHORE IS BEST? The integrated distributed model is focused on using Benefits: onsite, nearshore, offshore, and client teams, with • Headcount down 10% after first year and by an common tools and methodologies to maximise additional 5% after second year. leverage in meeting clients’ process, language and • Around 50% cut in cost for the services transferred service needs. from US and Western Europe. • Enhanced quality (eg error rates reduced compared CASE 1 with pre-outsourcing). Hub and spokes structure for optimal localisation of • Improved control environment, as reflected in cleaner front- and back-office support internal and external audits. • Centrally orchestrated and co-ordinated continuous Front office, Poland improvement and KPI/SLA compliance assurance and quality control. Client Back office, China Collections centre, Guatemala CASE 2 Centralised F&A function for standardised processes Company: The Danfoss Group is an international business specialising in the research, development and production of mechanical and electronic components Company: and solutions. A global manufacturing business. Business issue: Business issue: Danfoss had local accounting departments in each The company’s transactions were executed within each European country (plus South Africa), which operated country of operations by localised accounting on fairly standard SAP solutions and generated functions. There were no uniform procedures and no variations in local processes. centralised overview of transaction processing. Solution: Solution: Selected European F&A processes were moved into a Transaction processing moved to two centralised front- single location – Krakow – to assure standardisation, office locations plus back-office support. Krakow, automation and lower costs. Poland front office provides problem resolution, collection and other functions that require ongoing Benefits: contact with client and third parties. Guatemala City • Significant productivity savings. front office handles voice services for North America, • Reduced number of FTEs performing accounting providing dedicated collection activities. Guangzhou duties. Centre, China delivers transactional tasks. Krakow is the • World-class quality of accounting processes. command centre for all three locations, driving • High level of transparency. additional controls, process improvement, and • Standard solution to be applied for the new US and operational conference calls with the client. APAC scope.08 icaew.com/fmfac
  11. 11. THE FINAL SELECTIONMAKING THE DECISIONOnce the decision on sourcing has been taken, crucial aspects to consider includemanaging the transition, arranging security and disaster planning. Some advice isoffered below.In order to make the right sourcing decision, the to ensure the provided responses are incorporated in theorganisation must be clear about the objectives of its contract, the better the contract and the resultingsourcing strategy. Whatever operating model is selected, sourcing relationship.its implementation will not be easy. Thus, it is imperativeto involve the right stakeholders. To have the strong What you can and cannot outsourcesupport of the executive board, an excellent business case The pooling of skills into silos for greater standardisation,must be built, one that goes into details, showing a good automation and control makes sense. Yet, though therate of return and payback, and demonstrating benefits derived from such a practice have began to shiftmeticulous planning. To clearly know and understand from labour arbitrage and cost cutting to top-linewhat the change will mean for the organisation, change augmentation, what can be outsourced has not changedmanagement activities must be effectively measured and all that much.tracked. The basic rule of thumb is – if tasks can be Strong governance is key and the decision process the documented to an 80/20 level or higher, if they can beorganisation follows must be rigorous, starting with a repetitive, and if they can be learned in no more than sixrequest for information (RFI) and then a request for weeks given a certain skill level then they can beproposal (RFP) – also possibly with the assistance of an outsourced. Thus, this model of delivery can be appliedadvisor firm, especially if the organisation is making this to transactional activities, not to value-added activities,type of decision for the first time and/or would like to decision taking, strategy or policy.accelerate the process. The more thorough the questions It is important to note that in most organisations,posed in the RFI and the RFP and the more care is taken such transactional activities account for 80% of the Figure 4 Typical division (%) of business processes into those that can be pooled into shared services and those that cannot. • Receive invoice • Scan invoice • Check invoice • Automatic purchase order based invoice matching • Resolve invoice without purchase orders with Diagram 5 Typical division of business processes into those that can be pooled into shared services and customer •those that cannot. Raise standard accruals • Maintain vendor master data • Receive payments • Make payments • Match customer • Resolve vendor queries payments with invoices • Identify disputes • Book standard accruals • Identify collection • Close 100% ‘problem accounts’ • Reconcile general • Forward non-paying • Manage bank accounts • Register assets ledger with sub-ledgers • Produce standard problem accounts to • Reconcile bank • Depreciate assets • Prepare statutory reports either a collection statement according to accounts agency or a lawyer depreciation policies 50% 30% 30% 20% 20% Accounts Accounts Cash and Fixed Financial Management payable receivable banking assets accounting reporting 20% 20% 30% 30% 50% • Set credit policy • Make physical • Resolve customer • Communication of inventories • Post non-standard queries expectations regarding • Perform physical accruals and write-offs cash movements tagging • Perform business Shared activities reviews • Liaise with tax Non-shared activities authoritiesFINANCE & MANAGEMENT SPECIAL REPORT December 2010 09
  12. 12. ‘In order to qualify what would be best to keep in-house and what would be best to outsource, the organisation should follow a structured decision matrix’ headcount. Figure 4 provides a clear overview of the remain in-house, as in the case of Coca-Cola Enterprises typical scope of F&A shared services. (see the case study, below). In order to qualify what would be best to keep in- house and what would be best to outsource, the Best location organisation should follow a structured decision To select the right sourcing location, organisations need matrix. A typical decision matrix will look at the to step beyond short-term location trends and make a interplay of: decision based on robust evaluation criteria tailored to • complexity – the more complex a process, the the specific requirements of the organisation and of the more likely it is to be delivered in centres of market in which it operates. The choice of sourcing expertise specialised in the processing of a single location cannot be solely based on cost but must factor function; in environmental, political and operational • the relationship with the core business – the higher considerations. See Figure 5 (opposite) for the three the strategic impact of the process, the more likely factors relevant to the localisation decision. they should be retained in-house; • critical mass – the higher the volumes and the Pricing methodologies potential for standardisation, the easier to achieve The four most common pricing mechanisms are: economies of scale; and • the local impact – the higher the local impact Fixed price (regulations, language, flexibility of support), the The model provides for a contractually defined profile of more likely to keep activity in the country rather charges for the term of the contract, which incorporates than in a central hub. both the variable and fixed costs of service delivery. Typically, these fixed monthly charges decrease over the Additionally the organisation can conduct a term of the contract due to committed productivity and benchmarking exercise to determine maturity and efficiency improvements. Fixed pricing is based on the stability of each process and sub-process. Then, process principle that baseline business volumes, and therefore maturity can act as the decision lever for what process the work effort and cost required to process them, remain or sub-process to outsource and what is better to constant throughout the contract term. CASE STUDY: COCA-COLA ENTERPRISES Coca-Cola Enterprises achieves major cost savings through road to achieve efficiencies with the least risk was to outsource as finance optimisation project much of the transaction work as possible, and at the same time do more centralisation of the higher level transaction processing Company: in its established shared services centre in Tampa, FL. Coca-Cola Enterprises (CCE) is the global marketer, producer and CCE and Capgemini implemented a solution throughout CCE’s distributor of Coca-Cola products. global business to create an efficient process in a cost-effective environment for order-to-cash services, purchase-to-pay Business issue: accounting and record-to-report activities. Capgemini’s solution is CCE was not realising the full benefits of a centralised shared delivered from three offshore locations: services centre. It set the goal of saving $20m a year in • collections, deductions management and customer service are transaction work costs through a finance optimisation project. provided from Guatemala City, Guatemala; • order-to-cash, record-to-report and purchase-to-pay processing Solution: are provided from Krakow, Poland; and To identify what processes were mature enough for outsourcing, • back office functions in master data, cash application, credit and CCE went through a benchmarking exercise with the Hackett various other activities are from Chennai, India. Group to see how the organisation’s effectiveness and efficiency stacked up against the competition. The Hackett Group assessed Benefits: the maturity and stability of each sub-process within CCE’s order- • Accelerate the transformation and help achieve near world-class to-cash, procure-to-pay, and record-to-report functions. While the performance by standardising and streamlining operations. company was doing pretty well on the scale of effectiveness, • Deploy a global unified solution across all CCE business units to approaching world class, it had a way to go in terms of efficiency. The study identified that to become more efficient, CCE would support the business that includes standardisation and process need to conduct as much of its transaction processing as possible improvement while maintaining high standards of control and in a low cost country, either with a third party outsourcer or a compliance to achieve a minimum savings target of 25%. captive shared services centre. • Mitigate risks while transitioning the work and implementing Since CCE was not active in a low-cost country, the quickest new tools, systems and technologies.10 icaew.com/fmfac
  13. 13. ‘As soon as the most beneficial sourcing model has been selected, an implementation scenario needs to be defined’FTE based pricing costs of delivery and an allocation of fixed costs.Under this model, monthly charges are calculated by Whereas the ARC/RRC mechanism described above isapplying a rate card to the actual number of FTEs used to periodically adjust a fixed charge within aused to deliver services. defined volume band, full transactional pricing is calculated bottom up each month by multiplying theFixed price with ARC/RRC mechanism volume of transactions processed by the applicableThis is a variant on the fixed price model that transaction price for that volume band.addresses the issue of changing business volumesusing additional resource charges (ARC) and reduced Depending on an organisation’s attitude toward riskresource credits (RRC) that reflect the variable cost of and reward, the pricing model can provide for aprocessing one more or one less transaction. They are gain-share mechanism to incentivise both parties toused to automatically adjust fixed price contracts to collaborate to further reduce the costs of service orreflect moderate volume fluctuations throughout the deliver other business benefits.contract term. TransitionTransaction pricing As soon as the most beneficial sourcing model hasUnder this model full transaction pricing units are been selected, an implementation scenario needs todefined in the contract for different volume scenarios. be defined. Organisations should assess internalThese transactional prices include both the variable services, decide what they want to achieve, and Figure 5 A closer look at the interplay of the three factors underlying the sourcing localisation decision Government and industry regulation Economic and currency stability Local stability Pro-business regime Environmental and political factors Political stability and openness Natural disaster/security risks Geographic logic Proximity to large conurbations Labour force availability Language capability Technical skills IT and telecoms reliability and speed Infrastructure and accessibility Transport links Time constraints Define project and transition requirements Development and retention capabilities Operational factors Greenfield/brownfield Business logic Business engagement requirements Proximity and access to customers, suppliers and head office Cultural fit with organisation Operational context Proximity to other shared services Government grants and other incentives Stable taxation rate Cost factors Current operating costs Labour costs Financial logic Space and infrastructure Operating costs HR Labour force trends Employment regulations Expected cost inflationFINANCE & MANAGEMENT SPECIAL REPORT December 2010 11
  14. 14. Figure 6 Shifting from traditional to transformational methodology for more rapid transitioning and productivity gains Traditional approach Transformational approach Lift Shift Consolidate Improve Lift Transformation Shift Improve As-is Processes to Processes Transitioned As-is Processes to New Transitioned processes new from many services to processes new processes services from client centre(s) entities to drive up from client processing into fewer drive up locations fewer productivity locations model centre(s) productivity centre(s) and/or system Increased transition complexity but delivers greatest Lowest risk but delays benefits and productivity gains productivity in shorter period determine how to get there. There are four intellectual property are often cited as key reasons why implementation possibilities that might be organisations choose not to outsource to an external considered: provider. BPO providers must ensure sufficient security • lift – the process is handed over in the current condition measures to limit the risk of intellectual property theft or to the BPO or SSC; breaches of confidentiality. • shift and lift – the process is first transformed before it is Security procedures should address data security, handed over; physical security, and intellectual property protection. • lift and shift – the process is first handed over Regardless of the exact procedure implemented to whereupon transformation commences; and assure security, it is important that international security • step by step – programmed transformation. standards are observed and that regular audits (both internal and external by the relevant institutions) are In the transformational approach, while processes are carried out. The industry benchmark is ISO/IEC lifted they are also studied and matched against best 27001:2005. It specifies the requirements for practice and adjusted to minimise variance. The establishing, implementing, operating, monitoring, combining of the number of actions into one timeframe reviewing, maintaining and improving a document means a much quicker leap to improvements – see Figure information security management system within the 6 (above). Also, the organisation and the vendor can context of the organisation’s overall business risks. It agree that during the transition a defined level of specifies requirements for the implementation of standardisation can be implemented right away during security controls customised to the needs of individual the transition. As this is done, the transition team can organisations or parts thereof. ISO/IEC 27001:2005 is review and suggest an implementation roadmap for designed to ensure the selection of adequate and further improvements and recommend tools and proportionate security controls that protect information methodology that could yield further improvements and assets and give confidence to interested parties. value not only during the transition but also afterwards. Especially when cost-savings are a primary driver, there Additionally, an organisation that outsources processes is understandable pressure to get an offshoring move to a third party must be able to conduct regular security completed as quickly as possible. However, process audits of the processes on the third party’s premises. mapping and documentation cannot capture every detail of a process and the gaps should be filled by sending the Disaster recovery and back-up plans right number of staff for the right amount of time to Moving work and resources to a new location means observe the processes in their native location. In addition, having to prepare for new dangers. Just looking at subject matter experts from the organisation should plan recent history, we’ve seen what natural calamities can on spending a substantial amount of time in the offshore do. For example, the devastating floods in the location to ensure that training is done accurately, and to offshoring hot spot of the Philippines damaged be available for escalation during ramp-up and infrastructure and placed serious obstacles in the day-to- production cut-over.11 day operations of all businesses. Earlier in the year, the earthquake in Chile also reverberated not only in local Security operations but also in the parent organisations of CSS Assuring security and stability of processes is essential for and BPO centres. F&A shared services. Confidentiality and risk to Organisations also need to plan ahead for the possibility of an unplanned disruption in operations and demand of the SSC or the BPO to have a REFERENCES comprehensive business continuity and disaster recovery plan. Such procedures should also be aligned with 11 Liddell, Jamie, ‘Top Ten Mistakes Made When Offshoring’, Shared industry standards, such as the Business Continuity Services & Outsourcing Network, September 2010 Institute (BCI) Good Practice Guidelines and ISO 27002 www.ssonetwork.com Code of Practice for Information Security Management.12 icaew.com/fmfac
  15. 15. CONTRACTSCONTRACTUAL ISSUES ANDGOVERNANCE MODELSThis section provides guidance on setting out a clear and unambiguous contract whensetting up a good sourcing relationship.A good sourcing relationship is one built on atransparent, non-ambiguous and clearly writtencontract – a contract negotiated with the backing andfull commitment of senior leadership including thecommitment of the necessary finance management.12 ‘The customer and supplier organisations Even with continuous high-level leadership support, need to work together to finalise the planthe amount of effort that goes into contractnegotiation is often underestimated and the sticking incorporating all deliverables,points may not be what you would expect them tobe.13 dependencies and tasks and their Yet, an organisation needs to be as diligent as allocation to the parties’possible even at the expense of a delay inimplementation. No matter how close the relationshipbetween customer and supplier, or how confident anorganisation might be in the integrity and stability ofa proposed new location, the due diligence must beseen as an indispensable part of any offshoringprocess.14 requirements for the customer, the development and The customer and supplier organisations need to sign off of KPIs, as well as a formal mechanism forwork together to finalise the plan incorporating all issue resolution and escalation. The key questions todeliverables, dependencies and tasks and their be answered during the shaping of a contract areallocation to the parties, including governance shown below left.15structure, appointment and training of delivery team, The move to the FAO shared services framework willconfirmation of all policies and regulatory impact more than just the processes. Internal customers of finance will probably have to be much more rigorous in how they interact with the external customer. Third party suppliers may find themselves having to comply with new requirements. External customers may find that an outsourcer is the first line KEY CONTRACT QUESTIONS of cash collection as well as account maintenance. In addition, there will be a need for activities not needed earlier, such as contract management. • Who will do what as far as processes are Thus it is important that the outsourcing concerned? arrangement be clear on how processes are being • What will the service level from the supplier be? standardised and centralised and what the • What will the customer have to do? organisational impact of any deviations will be16, also • Who will do the reporting? so that internal stakeholders are well aware of and can • What happens if the customer wants to terminate prepare for the impending impact of the change. the agreement? • What happens if anything changes during the Exit management period of the contract? The cause and circumstances surrounding contract • What happens if the service falls below the set termination, beyond simple contract expiration, can KPIs? vary significantly based upon specific circumstances, • What happens if the service falls significantly from a change in executive leadership or business below defined KPIs? strategy (as a result of a divestiture or introduction of • What if there is significant and persistent failure a new business model), to problems with against defined KPIs? performance, desire to renegotiate, all the way to • What happens if the supplier causes loss to the provider non-performance or loss of credibility. customer? Regardless of cause or category of termination, the • What happens if the contract is terminated? outsourcing contract should provide an explicit and • What happens with regard to transfer of clear exit strategy, with an accurate transition plan undertaking of protection of employment rights? covering the handover process. • What happens if parties cannot agree? An exit management clause in the contract should • What rights does the supplier have to provide include, but not be limited to, all activities and costs other services? related to ensuring the continuity of services, • What is the overall liability cap for the supplier? compliance with applicable guidelines, regulationsFINANCE & MANAGEMENT SPECIAL REPORT December 2010 13
  16. 16. ‘The governance structure should ideally be simple, with a single point of accountability from both the organisations’ and laws, and the transition plan and handover Figure 717 (below left) shows a suggested model for process itself. A significant focus will be on knowledge governance of an outsourcing relationship, a structure transfer and most of the time allocated in the hand- that establishes the best platform for governance. over will be to knowledge transfer. Offshoring is complicated enough without the added confusion of people not knowing specifically Getting the governance model right what they’re going to be doing, where and when. Relationship management is at the core of every Clear definition of roles and responsibilities should be successful outsourcing relationship. The governance thorough and top down. Key delivery team members structure should ideally be simple, with a single point should be engaged early in the project to ensure that of accountability from both the organisations as service migration smoothly transfers into the delivery follows: phase. The use of the future delivery team in the • interfaces between the two organisations should transition ensures that the knowledge captured and operate at various management levels. These need relationships built during transition can continue to be to be carefully defined so that personnel from both leveraged during the commencement of service organisations have a clear view as to who is delivery and thereafter. responsible for what and at what time; The outsourcer’s senior team members should • while formal structures are necessary, the participate in governance committees during service development of personal relationships is key. As staff migration and then in delivery. This will ensure at different levels have contact with one another, continuity of knowledge and ownership of any issues mutual trust and understanding is built; that arise. • over 95% of issues should be resolved without recourse to the next management level or formal escalation procedures; • the joint management team should be an open and honest partnership, with a positive culture of how to move forward, rather than apportionment of blame; and • The governance structure needs to evolve through time to reflect the transition from a major change programme to ongoing steady state service provision. Figure 7 REFERENCES Mirroring function governance model for sourcing 12 Scott, Peter, ‘Cutting costs in the finance function’, Buying organisation BPO provider From Outsourcing to Offshoring, October 2004, ICAEW, p. 8. Senior executives 13 Scott, Peter, ‘Cutting costs in the finance function’, BPO executive CEO, CFO, COO From Outsourcing to Offshoring, October 2004, ICAEW, p. 14. 14 Liddell, Jamie, ‘Top Ten Mistakes Made When Relationship Account Offshoring’, Shared Services & Outsourcing Network, manager manager September 2010 www.ssonetwork.com 15 Scott, Peter, ‘Cutting costs in the finance function’, Commercial Sourcing Contract From Outsourcing to Offshoring, October 2004, specialist manager ICAEW, p. 11. Global manager Global manager process ‘A’ Global process ‘A’ 16 Scott, Peter, ‘Cutting costs in the finance function’, Global business Delivery From Outsourcing to Offshoring, October 2004, process process liaison delivery ICAEW, p. 9. Global manager manager Global manager manager 17 Tornbohm, Cathy, ‘BPO: What Does Good Look process ‘B’ process ‘B’ Technology Like in 2010?’, Gartner Outsourcing & IT Services IT IT manager manager Summit in London, June 2009.14 icaew.com/fmfac
  17. 17. CUSTOMER SERVICESERVICE LEVEL AGREEMENTS ANDQUALITY ASSURANCEMaintaining standards of service is highly important. The use of KPIs, benchmarking andservice level agreements are fundamental to this.Service level agreements (SLAs) are the central Figure 8 (below) suggests stages for building an SLA.instrument to agree for the provision of services The SLA should be a flexible mechanism that allowsbetween the customer and supplier of shared for adjustments, according to changes in theservices. Under it the customer commits to delivering customer’s business requirements. The contractthe inputs necessary for the supplier to render the should provide for regular review of the SLAs toservice and to supporting the measurement and prepare for changes and also for agreeing to all theevaluation of performance and continuous implications that such changes could cause –improvement efforts. On the other side, the supplier together with the proper KPIs that will be used tocommits to the provision of the services, to the monitor the SLA.coordination of the measurement and evaluation of Procedures need to be defined in the SLA on theperformance, continuous improvement, and to way the metrics are calculated ensuring those metricsenhancing the services portfolio. To this end, the SLA can be compared across time periods, using the KPIsmust define: as benchmarks of quality targets defined in the SLA.• the scope of service; It is also important KPIs reflect activities over which• the contact person; the supplier has control, rather than setting global• KPIs and target values; KPIs where the customer also has a major influence.• a measurement process; All KPIs benchmark efficiency, the most basic of• the change request process; measures focused on time and cost. KPIs can also• a process for escalation; and measure effectiveness – accuracy and timeliness – of• pricing and allocation. the delivered services. Figure 8 A sample staged approach to building an SLA framework 2 weeks 3 weeks 4 weeks 4 weeks 2 weeks 1 week Defining scope Validate and Implement and Design framework Develop SLA and plan review embed • Assess work done to • Design SLA Framework • Focused session to • Agree additional • Educate and train • Measure post- date (eg review SLA – Define key define performance activities with end users shared services team implementation success already in place if contractual terms levels either by and commercial impact members in the SLA (to be carried out by appropriate, assess KPI (duration of negotiation and/or by • Customer workshops to management process Shared Services and work done, SLAs for agreement, service characteristic. validate expected • Implementation of tools business owner on an legal etc.) commencement (Integrate with KPI performance levels with and reporting to ongoing basis) • Identify key etc) work) business users measure the SLAs (if • Ensure additional stakeholders • Develop principles for • Develop additional tools • Agree SLA framework required) reports produced are • Define SLA scope, SLA design and reporting to (including - ownership, • Develop guidance and verifiable and are easily purpose objective, – Roles 7 measure SLA role and responsibilities, FAQs on SLA presented Activities critical success factors responsibility matrix • Identify country governance, escalation • Assessment of potential • Create project charter, – governance dependencies and time process, commercial future challenges detailed plan, risk and structure lines of information arrangements) • Identify continuous issues – commercial provision • Agree detailed service improvement feedback • Build draft SLA template framework (to cover • Develop levels and dependencies mechanism • Review early cross charge communication • SLA and framework sign • Handover to shared requirements eg transfer mechanism, framework off services SLA owner pricing, tax penalties etc) (channels/methods) considerations, legal – option for charging • Develop demand management process • Define escalation mechanisms • Scope Definition • SLA framework design - • SLA developed • SLA and framework sign • SLA go-live • SLA post-go-live Document to include roles and • Escalation/demand off assessment future Deliverables • SLA development and responsibility matrix, management defined challenges identified rollout plan governance structure • Stakeholder engagement plan • SLA template • Issue and risk logFINANCE & MANAGEMENT SPECIAL REPORT December 2010 15
  18. 18. ‘Quality management and continuous improvement underpin the path to service delivery excellence, efficiency and process transformation’ KPIs can relate to review process controls, ie policies Quality management system (QMS) and procedures established and implemented to help Quality management and continuous improvement ensure effective response to risk. In addition, some underpin the path to service delivery excellence, suppliers offer to measure the value in business benefit efficiency and process transformation. Quality terms derived from the provided service (see the box assurance processes are used to identify, evaluate and below ‘Diamond KPIs’). monitor quality and performance so that clients are provided with the highest quality deliverables and Service quality plan work products. Beyond the SLA, the service quality plan (SQP) is one of The QMS should be implemented to assist the the key documents that describes how the quality organisation in identifying and monitoring quality of management system is implemented for a specific the provided services. QMS should be a thorough customer across multiple centres. The SQP features a top-down mesh of well-documented and monitored description of the delivery process, standards, procedures policies and procedures, abided by all under clear and tools that are appropriate for the delivery. and consistent lines of accountability. The quality It also includes quality procedures, quality review plans, procedures should be documented, controlled and technical review plans and procedures to check held in a central repository as should process maps deliverables. Moreover, it defines the financial and desktop procedures. management process, change management process, QMS should be structured as a coherent client satisfaction implementation plan, the monthly management system using recognised quality delivery review process as well as the problem/issue standards, such as: management process. • quality planning – ISO 9001:2008; • quality governance – ISO 9001:2008; • quality assurance – Six Sigma/Lean, OTACE; and • quality improvement – Six Sigma/Lean. DIAMOND KPIs For FAO it is recommended that QMS be compliant Key performance indicators (KPIs) form the backbone of performance with ISO 9001:2000/2008 as that certification has a measurement under service level agreements (SLAs). Diamond KPIs high degree of focus on process documentation focus more on the service efficiency (productivity) and show how they which is so important in accounting and finance. can help the customer achieve world-class operational performance Secondly, the quality management principles defined in ISO 9000:2008 (Quality Management Effectiveness KPIs Systems, Fundamentals and Vocabulary) and in ISO • Credit: % credit applications processed accurately 9004:2000 (Quality Management Systems, Guidelines • Master Data: % changes processed accurately for Performance Improvements) emphasise the role • Collection: % overdue receivables that customers play in an organisation’s QMS. • Cash: % lines matched accurately Specifically, customer requirements guide how • Query: % queries over 10 days old services are provided and customer satisfaction • Reporting: % reports issued on time evaluates service output. Control KPIs Compliance • Master Data: % detected segregation of duties exceptions There are three aspects to compliance in delivery of • Pre-process: % prevented duplications / incorrect scanning of services: documents • ensuring compliance of delivery centres with local • Capture: % prevented incorrect / incomplete transfers from laws and regulations of the country in which the procurement system centres are located. Here the key control areas are: • Authorize: % prevented duplicated / fraudulent invoices processed – human resources, corporate, financial and • Query: % detected unauthorized requests taxation requirements, data protection and • Payment: % detected segregation of duties exceptions privacy; – telecommunication, software and other Value KPIs controlled components; and • Credit: % bad-debt write-off – occupational health and safety. • Master Data: % compliance • ensuring compliance with local laws and regulations • Collection: % Days Sales Outstanding (DSO) of the country to which the services are being • Cash: % cash unallocated delivered remotely. Key control areas here are the • Query: % change current to previous month queries to invoices ratio organisation’s policy and regulations, licensing and • Reporting: % of ad-hoc reports customer protection laws; and 16 icaew.com/fmfac

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